Is this the market bottom?

After writing off 2008 as a bad dream, the Indian investor is now left wondering whether it is time to call a market bottom anytime soon or if 2009 will be a repeat of the miserable 2008. The year till date has not been particularly encouraging for equity investors with the sensex down about 14% and the mid and small cap indices by a steeper 20% or thereabouts. In addition, the rupee is down another 6% year to date and the foreign institutional investor has continued the selling spree with around $2 billion of net sales in 2009 till date following the $13 billion of sales in 2008. Expert opinion appears divided between a potential market rebound and an imminent crash. It is, therefore, worth trying to make some sense out of the mayhem that may help guide investors to make informed decisions. Though the market has been correcting since January 2008, the December 2008 quarter was the first quarter since the turn of the millennium that the sensex companies have shown a significant near 20% de-growth in earnings. Even this earnings de-growth was buoyed by a robust performance by the financial sector that accounted for just under a third of the sensex profits and a 22% earnings growth. It is well known that falling interest rates and consequently high investment profits among banks contributed to a disproportionately large portion of the December 2008 quarter profits. This is unlikely to be repeated over the next few quarters because interest rates are possibly close to bottoming out after last week’s repo cut by the Reserve Bank of India. Moreover, public sector banks are unlikely to be earning a margin over their marginal costs on the flavour of the season — mortgage lending at “directed” rates — even without considering potential delinquencies. The spectre of non-performing loans looms large on the banking system with a slowing economy despite being deftly postponed by creative “restructuring”. With the economic slowdown gaining momentum and possibly getting deeper and wider on the back of a worsening global environment, the outlook on corporate earnings cannot be anything but gloomy. From an earnings growth projection in the mid to high teens a few months ago, analysts are settling down to earnings de-growth in FY09 and FY10. Viewed against this background, even at near 8,000 levels for the sensex, it is difficult to make the case for a compelling buy on India. The marked deterioration in government finances over the last few months has resulted in the budgeted market borrowing of some $60 billion in FY10 and this can only rise further because of a slowing economy and subsequent cuts in excise and service tax. With this level of borrowing, the dalliance with low interest rates cannot last long. At about half the expected deposit accretion in the banking system and twice the statutory liquidity ratio, government borrowing of this magnitude will inevitably lead to choking of credit to the private sector in addition to bidding up interest rates.
Source: ET